In announcing a significant policy change, the U.S. Department of Justice (DOJ) said that when it concludes that a qui tam case lacks merit, it will file a motion to dismiss the case rather than allowing the relator to continue.

The surprise announcement was made by Michael Granston, director of the commercial litigation branch of the fraud section in the DOJ’s civil division, during the Health Care Compliance Association’s Health Care Enforcement Compliance Institute in Washington, D.C. on Monday.

While it certainly would be welcome if the government exercised its long held statutory power to dismiss FCA cases, 31 U.S.C. § 3730(c)(2)(A), this announcement raises more questions than it answers. For example, it is not clear that this is a policy change at all. DOJ has always had the ability to move to dismiss cases. But it has done so only rarely. United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139 (9th Cir. 1998); Swift v. United States, 318 F.3d 250 (D.C. Cir. 2003). If this is a true policy change, then we would expect the government would more frequently exercise its dismissal power. But Mr. Granston’s statement, as reported (the speech is not posted on the DOJ website), does not indicate whether the government will more frequently dismiss qui tam suits, only that it will do so when it concludes a case lacks merit. This, in our view, is consistent with current policy and therefore leaves us wondering whether this is a “policy change” at all.

It is also unclear how the government will conclude that a case lacks merit versus deciding to not intervene due to other factors, such as whether the cost of pursuing an action is worth the benefit that would result from a successful outcome. See United States ex rel. Williams v. Bell Helicopter Textron, Inc., 417 F.3d 450, 455 (5th Cir. 2005) (acknowledging that the government’s decision to intervene in a case can be due to a variety of factors, such as “a cost benefit analysis.”). Given its broad authority to dismiss cases, making such decisions without any particular standards or procedures is troublesome and raises Constitutional concerns due to usurpation of the judicial power.

This policy, if it is a policy that is actively applied, could also have far-reaching implications on both motions to dismiss and dispositive motions involving materiality argument. As to motions to dismiss, we would expect qui tam relators to argue in non-intervened cases in which the DOJ has not moved to dismiss that DOJ has concluded there is merit to the litigation (but elected to not intervene for other reasons). While we hope that Courts will not fall for this, recent decisions involving materiality suggest courts are giving more weight to the government’s intervention decision. United States ex rel. Petratos v. Genentech, Inc., 855 F.3d 481, 490 (3d Cir. 2017) (government’s decision not to intervene suggested the alleged false certification was not material to the government’s decision to pay claims); United States ex rel. Badr v. Triple Canopy, Inc., 857 F.3d 174, 179 (4th Cir. 2017) (government’s decision to “immediately intervene” suggested the alleged false certification was material to the government’s decision to pay claims).

Finally, it will be interesting to see if there is any uptick in motions to dismiss filed by DOJ in the coming year. Although the Las Vegas bookmakers have, oddly, yet to post any odds that there will be more motions to dismiss filed by the government, we believe that there will be no statistically significant uptick.

]]>https://www.fcadefenselawblog.com/2017/11/dismiss-unmeritorious-qui-tam-suits/feed/0https://www.fcadefenselawblog.com/2017/11/dismiss-unmeritorious-qui-tam-suits/Head on Collision: 5th Circuit Crashes Into Massive $663M Guard Rail Jury Verdict on Materiality Groundshttp://feeds.lexblog.com/~r/FalseClaimsActDefense/~3/V4nnDTHnMJs/
https://www.fcadefenselawblog.com/2017/10/rail-jury-verdict-trinity/#respondThu, 12 Oct 2017 15:47:00 +0000http://www.fcadefenselawblog.com/?p=1440Continue Reading]]>The story behind the Trinity Industries False Claims Act (FCA) litigation is one that is becoming too familiar for companies that do business with federal and state governments. Luckily, that story now has some silver lining, after the Fifth Circuit recently overturned a massive $663 million jury verdict against the company.

The case came about on the theory that Trinity failed to disclose to federal highway regulators changes made to its guardrail design in 2005. The problem with this theory was that regulators had already tested Trinity’s modified guardrail design and made payments for such guardrails. Moreover, after presented with a PowerPoint presentation by the relator (colloquially referred as a “whistleblower”), highway regulators investigated Trinity, and decided to continue paying for the guardrails notwithstanding the relator’s allegations. A jury from Marshall, Texas found in the relator’s favor. It rendered a verdict that, once trebled and subjected to additional monetary penalties, totaled $663 million, which was among the largest in the FCA’s history.

In overturning the verdict, the Fifth Circuit reinforced the Supreme Court’s recent decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016) (Escobar). There, the Supreme Court held that the implied certification theory is a valid basis of liability under the False Claims Act, but only if the alleged false certification was material to the government’s decision to pay. Importantly for the purposes of the Trinity litigation, the Supreme Court explained,

[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.

Escobar, 136 S. Ct. at 2003-04.

Throughout the decision, the Fifth Circuit reaffirmed the notion that the False Claims Act is not a garden variety regulatory enforcement statute—it is an anti-fraud statute and should be treated as such. Some of the decision’s “greatest hits” include the following:

Questioning the “falsity” aspect of the jury’s verdict, the court found “the regulations as written accept that engineers need not disclose changes where, in their good engineering judgment, they deem further testing unnecessary. Disagreement over the quality of that judgment is not the stuff of fraud.” Slip. Op. at 17 (emphasis added).

Noting that a government’s decision to pay in the face of potential loss of life, the court noted “[w]here violations of the ‘certain requirements’ described by Escobar involve potential for horrific loss of life and limb, the government has strong incentives to reject nonconforming products, and Escobar’s cautions have particular bite when deployed to decisions as here.” Id. at 29.

Finding that the knowledge to be gauged is not what was disclosed to the government, but instead what the government actually knew, the court explained “the relevant inquiry is not what Trinity disclosed, but what FHWA knew at the time it issued the June 17, 2014 memorandum, no matter the source.” Id. at 36 (emphasis added). “Even if Trinity deliberately withheld information from FHWA, it does not mean that the government’s decision that the [guardrails] remained eligible for reimbursement was the product of ignorance—[the Relator’s] PowerPoint presentation and the allegations in his FCA suit informed FHWA of the 2005 changes. And still FHWA paid because it was not persuaded by the allegations.” Id. (emphasis added).

Observing the significance of the government’s decision to not intervene in the case or otherwise produce officials to testify as a suggestion of the alleged violations’ immateriality, the court wrote “The government has never been persuaded that it has been defrauded. It so advised [the Relator] after his repeated meetings disclosing the changes in the product he says was wreaking havoc on America’s highways, leaving him to file his own suit as was his statutory right. Following discovery, as he made his eve-of-trial Touhy request that the government produce officials to testify, the Department of Justice declined, once again sending the message that the government did not believe itself to be a victim of any fraud, a position from which it has not to this day retreated.” Id. at 39 (emphasis added).

Explaining the Federal Highway Administration’s role in all of this, the court explained that the agency “[i]n turning back [the Relator’s] views and proofs, it balances the federal fisc, motorist safety, and other factors across the spectrum of myriad presentations to disclaim victim status. Such decision making is policy making, not the task of a seven person jury—such a result confounds the premise of qui tam actions: that the government was the victim.” Id. (emphasis added).

In short, this was a very favorable decision and follows a series of other decisions in which courts have found that the government’s decision to pay a claim (or not) in spite of its knowledge of an alleged violation is strong evidence that the alleged violation is not material.[1] It is also notable because it demonstrates that appellate courts will not let an unreasonable jury verdict in a plaintiff-friendly jurisdiction unfairly wreck a defendant’s business. Indeed, in rejecting the jury’s verdict, the Fifth Circuit found that as “revered as is the jury in its resolution of historical fact, its determination of materiality cannot defy the contrary decision of the government, here said to be the victim, absent some reason to doubt the government’s decision as genuine.” Id. at 40.

[1]United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325 (9th Cir. 2017) (noting that the government accepted Serco’s reports despite their noncompliance with the relevant guidelines and thus the monthly reports were not material); United States ex rel. McBride v. Halliburton Co., 848 F.3d 1027 (D.C. Cir. 2017) (noting that there was strong evidence that the requirements allegedly violated were not material because that the Defense Contract Audit Agency investigated the relator’s allegations and did not disallow any charged costs); United States ex rel. Petratos v. Genentech, Inc., 855 F.3d 481 (3d Cir. 2017) (ruling that the relator did not sufficiently plead materiality because the FDA did not enforce its adverse-event reporting rules nor require the drug, Avastin, parent company to change the drug’s label after becoming aware of the relator’s allegations); Abbott v. BP Expl. & Petroleum, Inc., 851 F.3d 384 (5th Cir. 2017) (noting that the Department of the Interior allowed BP to continue drilling after a substantial investigation into the plaintiff’s allegations of requirements violations and thus the Department’s decision represents strong evidence that the requirements were not material); United States ex rel. Escobar v. Universal Servs., Inc., 842 F.3d 103 (1st Cir. 2016) (holding that an agency’s decision to pay a contract in full despite actual knowledge that requirements were violated is very strong evidence against the materiality of those requirements); D’Agostino v. ev3, Inc., 845 F.3d 1 (1st Cir. 2016) (noting that the FDA did not withdraw its approval for a device in the six years following the relator’s allegations which casts serious doubt on materiality of the fraudulent representations); United States v. Sanford-Brown Ltd., 840 F.3d 445 (7th Cir. 2016) (emphasizing that the subsidizing agency and other federal agencies had examined the for-profit higher education enterprise multiple times and concluded that neither administrative penalties nor termination were warranted and therefore the fraudulent representation was not material). But see United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890 (9th Cir. 2017) (holding that questions of materiality remained even when the FDA had continued to pay for the drug).

]]>https://www.fcadefenselawblog.com/2017/10/rail-jury-verdict-trinity/feed/0https://www.fcadefenselawblog.com/2017/10/rail-jury-verdict-trinity/Materiality Part I: Distinguishing Important Representations from the Minor or Insubstantialhttp://feeds.lexblog.com/~r/FalseClaimsActDefense/~3/nLCpl-Ie5iE/
https://www.fcadefenselawblog.com/2017/08/materiality-minor-or-insubstantial/#respondFri, 11 Aug 2017 19:11:41 +0000http://www.fcadefenselawblog.com/?p=1439Continue Reading]]>Editor’s Note: This is the first in a five-part series on how U.S. district courts and courts of appeal have applied the materiality standard set forth in Universal Health Services, Inc. v. U.S. ex rel. Escobar.

In Escobar, the Supreme Court described several factors that a district court should consider in assessing whether a particular contractual, regulatory, or statutory violation was material to a government’s decision to pay. One of those factors was whether a “reasonable man [acting on the Government’s behalf] would attach importance to [the representation] in determining his choice of action in the transaction.” at 2003. It follows that a reasonable person would not attach importance to a violation that is “minor or insubstantial.” Universal Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989, 2003 (2016) (emphasis added). So how have the district courts handled this “reasonable man” objective standard? And what types of violations are minor or insubstantial? This article explores the answers to those questions.

One district court has found significance not in whether a particular issue is regulated, but whether a defendant’s compliance with that regulation influenced the government’s decision to pay.

That the Government or a federal agency found a particular issue important enough to regulate speaks little to the intended consequence of noncompliance. . . . Ultimately, the relevant inquiry is whether the Government’s payment decision was influenced by claimant’s purported compliance with a particular requirement, not whether a given issue has been deemed worthy of regulation.

Thus, in cases where the Government’s payment decision was affected by noncompliance, courts were more likely to find such violations “material” for purposes of the FCA. For example, in Scott Rose v. Stephens Institute, 2016 WL 5076214 (N.D. Cal. Sept. 20, 2016), the court relied on the government’s actions taken against other parties that violated the regulatory provision at issue. The court noted that the Department of Education recovered tens of millions of dollars against these parties by opening incentive compensation ban cases against them. Such enforcement activity, the court held, showed the government was concerned about violations and that such violations were material to the government’s decision to pay. The court also found that enforcement became more aggressive over time. The government also eliminated various regulatory safe harbors as time went on. These changes in policy demonstrated that the violations were indeed material to the government.

Other courts have used the “reasonable person” standard to find certain de minimis violations to be minor or insubstantial. For example, in Grabcheski v. American International Group, Inc., 2017 WL 1381264 (2nd Cir. Apr. 18, 2017), the Court held that a relator failed to state a claim because he did not allege how a 0.4% difference in value would have affected whether the parties would have entered into an agreement.

In contrast, in U.S. ex rel. Emanuele v. Medicor Assocs., 2017 WL 1001581 (W.D. Pa. Mar. 15, 2017), the court found that the failure to adhere to a Stark Law exception’s ‘writing’ requirement was not “minor or insubstantial.” The Stark Law generally prohibits a physician from referring Medicare patients for designated health services to an entity with which the physician maintains a financial relationship. Many exceptions to that general prohibition require the financial relationship at issue to be “set out in writing.” See, e.g., 42 C.F.R. § 411.357(d). In finding that the ‘writing’ requirement was not “minor or insubstantial,” the court explained, “[c]ompliance with the writing requirement permits a reviewer to analyze the timeframe, rate of compensation, and the identifiable services contemplated in the arrangement to determine whether any portion is based on the volume or value of physician referrals.” Emanuele, 2017 WL 1001581, at *18. The requirement, therefore “plays a role in preventing fraud and abuse.” Id. (quoting 80 Fed. Reg. 70886, 71333-71334). Because of the writing requirement’s role in preventing fraud in abuse, the Emanuele court held that the writing requirement “go[es] to the very ‘essence of the bargain’ between the government and health care providers with respect to Stark [Law] compliance.” Emanuele, 2017 WL 1001581, at *18 (quoting Escobar, 136 S. Ct. at 2003 n.5).

Under the reasonable person standard for evaluating whether a violation is minor or insubstantial, a defendant cannot, as a defense, claim “the Agency did not know of the violation and therefore the violation did not matter.” It does not matter that the Agency did not actually know of the alleged violation. It matters only whether knowledge of a violation would have affected the Agency’s payment decision if it had known. So, for example, in U.S. v. Savannah River Nuclear Solutions, LLC, 2016 WL 7104823 (D.S.C. Dec. 6, 2016), “[t]he fact that the common law’s test of materiality in the tort context would not require the plaintiff to be aware of the representation supports the court’s conclusion that the DOE’s not being aware of FFS’s certifications is not dispositive of materiality.” Id. at *23. The court also observed that “common sense suggests that the alleged unallowability of the challenged costs would influence the DOE’s decision to pay them, and Defendants’ alleged conduct in covering up the costs suggests that they would be material to the DOE.” Id. at 24.

In short, a reasonable person’s payment decision is likely to be influenced only by significant violations. A simple way to distill this test is to consider whether the agency would have paid the claim had it known of the defendant’s violation. Compliance issues that would not cause the agency to deny payment would not likely trigger FCA liability under an implied certification theory.

Editor’s Note: In the next part of this series, we will explore the importance of government knowledge in assessing materiality.

]]>https://www.fcadefenselawblog.com/2017/08/materiality-minor-or-insubstantial/feed/0https://www.fcadefenselawblog.com/2017/08/materiality-minor-or-insubstantial/Another One Bites The Dust – False Claims Act Complaint Based On The Trade Agreements Act Is Dismissed With Prejudice For Relator’s Failure To Allege Fraud With Particularityhttp://feeds.lexblog.com/~r/FalseClaimsActDefense/~3/uaVJ6RT-hEA/
https://www.fcadefenselawblog.com/2017/07/fca-taa-particularity/#respondMon, 17 Jul 2017 16:29:52 +0000http://www.fcadefenselawblog.com/?p=1435Continue Reading]]>Opportunistic relators have made a cottage industry of filing claims under the False Claims Act (FCA) alleging that contractors are violating the Trade Agreements Act (TAA) by misrepresenting the country of origin of products being sold to the government. Many of these relators are not company insiders and, as a result, lack detailed information regarding the sales practices of their targets. Instead, these relators cobble together publicly available information and often base their claims of fraud on inferences and innuendo. Courts, however, have steadfastly required relators to allege their claims of fraud with particularity – i.e., pleading details regarding the who, what, when, where and how of the alleged fraudulent conduct. As a result, many unsupported FCA claims have been dismissed. The most recent example is the FCA lawsuit filed by Jeffrey Berkowitz against nine government contractors in the U.S. District Court for the Northern District of Illinois in U.S. ex rel. Berkowitz v. Automation Aids, et al., No. 13-C-08185.[1]

Mr. Berkowitz filed his initial complaint in 2013, alleging that nine government contractors made false statements regarding the country of origin of products they sold to the government through the U.S. General Services Administration’s (GSA) Multiple Award Schedule (MAS) program. Mr. Berkowitz lacked any inside information regarding the sales and practices of any of the defendants. Instead, he based his allegations on information he obtained in his role as the president of a competing government contractor. Specifically, Mr. Berkowitz alleged that he compared sales made by the defendants through the GSA Advantage! website to country of origin information he received for his company. The complaint attached lists of products that were sold to the government by each of the defendants from allegedly non-TAA compliant countries.

The complaint – which had been amended three times – was unsealed and served on the defendants in 2016. Shortly thereafter, motions to dismiss were filed by eight of the nine defendants. Seven of the nine defendants filed motions to dismiss on the ground that the complaint failed to plead fraud with the requisite particularity required by Rule 9(b) of the Federal Rules of Civil Procedure, and one of the defendants moved to dismiss pursuant to the “first-to-file” bar.[2] Surprisingly, one of the defendants attempted to answer the complaint. In a stroke of luck for that defendant, the Court found that the answer did not comply with the Court’s Local Rules and directed that the defendant file another responsive pleading. Recognizing its tactical error in the face of the motions to dismiss filed by the other defendants, this defendant subsequently filed a motion to dismiss regarding the complaint’s failure to allege fraud with particularity.[3]

On March 16, 2017, the Court granted the motions to dismiss filed by eight of the defendants based on the complaint’s failure to plead fraud with particularity as required by Rule 9(b). United States ex rel. Berkowitz v. Automation Aids, No. 13-C-08185, 2017 U.S. Dist. LEXIS 38457 (N.D. Ill. March 16, 2017). The court dismissed the one motion to dismiss based on “first-to-file” grounds,[4] but subsequently granted leave for that defendant to file another motion to dismiss.

In dismissing the claims against eight of the defendants, the Court found that, at best, the relator alleged a breach of contract, not fraud. That is because, even accepting as true the allegation that defendants sold products from non-TAA compliant countries,

there are no particularized allegations on specifically who engaged in the fraud, and what they did to execute it. Most important of all, there are no specific allegations from which to reasonably infer that someone in each company knew that the company was selling noncompliant products to the government; that the same someone also knew that the Trade Agreements Act required that the products be made only in certain countries; and that the same someone knew that the submitted claims amounted to an implied certification that the goods were in compliance with all statutory and regulatory requirements, so the someone decided to omit the country of origin from the submitted claims.

The Court recognized that Mr. Berkowitz’s failure to allege fraud with particularity likely stemmed “from the fact that Berkowitz is not a whistleblower insider of any of these firms.”

In granting the motions to dismiss, the Court declined to permit Mr. Berkowitz another opportunity to amend his complaint. Although Mr. Berkowitz made a “vague suggestion that he has further information he could file,” he never identified what additional specificity he could allege to “cure” his complaint’s pleading deficiencies. That, coupled with the fact that Mr. Berkowitz had already amended his complaint three times, warranted dismissal of the complaint with prejudice.

On July 12, 2017, the Court granted the motion to dismiss filed by the remaining defendant and entered final judgement against Mr. Berkowitz. In that decision, the Court reiterated that it is not sufficient for a relator to simply list allegedly non-compliant sales to satisfy the heightened pleading standard required by Rule 9(b). Instead, “detail about the fraud scheme” must be pled.

The Court expounded on its prior holding, stating, among other things, that “if at least one person at [the defendant] did not simultaneously know about the company’s noncompliance with the TAA and that it was submitting claims in such a way to hide or omit that compliance, then no fraud scheme has been pled.” In other words, “piling inference upon inference is not permitted.”

The Berkowitz decision is only the most recent in a long string of cases where opportunistic relators cobbled together publicly-available information in an effort to satisfy the heightened pleading standard necessary to plead a viable claim under the FCA. The Court in Berkowitz makes clear that complaints based on speculation and inferences are not sufficient to satisfy Rule 9(b). The holding in the Berkowitz decision provides yet another valuable safeguard to protect contractors who may find themselves in the cross-hairs of an opportunistic relator lacking any inside information regarding the a company’s sales practices and procedures.

[1] In the interest of full disclosure, Christopher Loveland represented three of the defendants in the Berkowitz case.

[2] The “first-to-file” bar provides that “no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5). In other words, an earlier complaint with the same FCA allegations served to “bar” the later-filed complaint.

[3] The misstep of this defendant serves as a valuable reminder of why it is critically important for contractors to retain experienced FCA counsel. Not all courts will provide a defendant with a second bite at the apple when they make a tactical error.

[4] The “first-to-file” bar provides that “no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5). In other words, an earlier complaint with the same FCA allegations served to “bar” the later-filed complaint.

]]>https://www.fcadefenselawblog.com/2017/07/fca-taa-particularity/feed/0https://www.fcadefenselawblog.com/2017/07/fca-taa-particularity/Escobar: Year Onehttp://feeds.lexblog.com/~r/FalseClaimsActDefense/~3/91D897NplTs/
https://www.fcadefenselawblog.com/2017/06/escobar-year-one/#respondFri, 16 Jun 2017 16:00:54 +0000http://www.fcadefenselawblog.com/?p=1426Continue Reading]]>One year ago today, the U.S. Supreme Court granted certiorari in Universal Health Services, Inc. v. U.S. ex rel. Escobar. To mark the one-year anniversary, we have prepared a handy desk reference describing the key holdings from this important case.

]]>https://www.fcadefenselawblog.com/2017/06/escobar-year-one/feed/0https://www.fcadefenselawblog.com/2017/06/escobar-year-one/Straight Shooter: The Fourth Circuit Stands By Its Earlier Decision In Case About Iraqi Security Guards Whose Inability To Shoot Straight Gave Rise to FCA Liabilityhttp://feeds.lexblog.com/~r/FalseClaimsActDefense/~3/rTCo1C_CHHQ/
https://www.fcadefenselawblog.com/2017/05/iraqi-security-fca-liability/#respondWed, 17 May 2017 16:20:08 +0000http://www.fcadefenselawblog.com/?p=1422Continue Reading]]>They say bad facts make bad law. And in the world of the False Claims Act (“FCA”) 31 U.S.C. § 3729, et seq., where much law is made at the dismissal stage, bad allegations can be just as dangerous. When the Triple Canopy case (U.S. ex rel. Badr v. Triple Canopy, Inc.) was on appeal before the Fourth Circuit for the first time in 2015, it seemed like it was the epitome of such a case. In 2015, courts were still wrestling with the viability of the implied certification theory under the FCA. So a case involving Ugandan mercenaries with falsified marksmanship scorecards hired to protect U.S. and Iraqi facilities in Iraq was exactly the type of case that seemed likely to cement the Fourth Circuit as a favorable jurisdiction for FCA cases brought under the implied certification theory. Recently, the Fourth Circuit ruled (again) on the case—this time taking into consideration the Supreme Court’s decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016). Although the FCA defense bar hoped this might result in a different decision, the Fourth Circuit appears to be standing by its 2015 decision in which it held that the government had adequately stated a claim for relief under the FCA’s implied certification theory.

So how did we get here? To recap, in 2009, Triple Canopy was hired by the Government to provide security services for an airbase in Iraq. The contract required Triple Canopy’s guards to qualify under specified firearm standards for marksmanship. When the hired guards could not demonstrate such firearm proficiency, a Triple Canopy supervisor allegedly directed the creation of false qualifying marksmanship scorecards for these guards, as well as additional guards hired, that were signed, sometimes allegedly post-dated, and placed in the guards’ personnel files.

A Triple Canopy medic who had been ordered to prepare some of the false scorecards, Omar Badr, filed a qui tam action under the FCA and the Government intervened in the case. The Government and Badr alleged violations of the FCA under the implied certification theory. Under this theory, the Government and Badr argued that Triple Canopy violated the FCA by merely submitting a request for payment. It was irrelevant, in the Government’s and Badr’s views, that Triple Canopy never explicitly certified compliance with the contract’s marksmanship requirement on its invoices, nor did Triple Canopy ever make any certification of any kind on the Government’s Material Inspection and Receiving Report (form DD-250).

In January 2015, the Fourth Circuit, relying on the troubling allegations in this case, unsurprisingly reversed the district court’s dismissal of the Government’s claim, finding a false claim is adequately pleaded if the party knowingly makes a claim for Government payment and withholds information about its noncompliance with material contractual requirements. The court reasoned, “If Triple Canopy believed that the marksmanship requirement was immaterial to the Government’s decision to pay, it was unlikely to orchestrate a scheme to falsify records on multiple occasions.” The Fourth Circuit also rejected the argument that, because the Government never reviewed the records, it could not have relied on the scorecards, finding that a false record could influence the Government’s payment decision “even if the Government ultimately does not review the record.”

About one year after the Fourth Circuit’s decision, and while a petition for certiorari in the Triple Canopy case was pending at the Supreme Court, the Supreme Court issued its landmark decision in Escobar. Escobar confirmed that the implied certification theory is a viable theory of liability under the FCA. Escobar went on to describe the FCA’s “rigorous” materiality standard and the types of facts that would be relevant to a district court’s determination of whether a particular certification was material to a Government payment decision. The specific and oft-cited rule from Escobar is that, to establish liability under the implied certification theory, a relator or the Government must show that a defendant’s claim for Government payment makes specific representations about the goods and services provided, and the defendant’s failure to disclose noncompliance with material contractual or other legal requirements makes those representations misleading. The Supreme Court stressed that the materiality requirement is “demanding,” and that noncompliance with contractual or other legal terms must have materially affected the Government’s payment decision. The Court noted that materiality is not necessarily satisfied even where a party violates an express condition of payment or the Government could have declined to pay the claim had it known of a party’s violation of a legal requirement. The Court also identified some facts that would be relevant to materiality, e.g., whether the Government “regularly pays a particular type of claim in full despite actual knowledge” of violations, indicating that the materiality standard is a fact-specific one. With the Escobar decision on the books, the Supreme Court sent the Triple Canopy case back to the Fourth Circuit for further consideration in light of its decision in Escobar.Triple Canopy, Inc. v. U.S. ex rel. Badr, 136 S. Ct. 2504 (granting petition for certiorari, vacating judgment, and remanding to the Court of Appeals for further consideration in light of Escobar).

In its recent decision, the Fourth Circuit found that Triple Canopy’s requests for payment constituted the types of “half-truths” identified in the Escobar decision. “[A]lthough Triple Canopy knew its ‘guards’ had failed to meet a responsibility in the contract, it nonetheless requested payment each month from the Government for those ‘guards.’” Slip Op. at 8. Just as the Supreme Court reasoned in Escobar, the Fourth Circuit found that “anyone reviewing Triple Canopy’s invoices ‘would probably—but wrongly—conclude that [Triple Canopy] had complied with core [contract] requirements.” Id.

And in regard to materiality, the Fourth Circuit noted that “nothing in [Escobar] undermines our earlier conclusion that Triple Canopy’s falsity was material. In fact, far from undermining our conclusion, [Escobar] compels it.” Slip Op. at 9. The court cited to a hypothetical provided in the Escobar decision, which states as follows:

If the Government failed to specify that guns it orders must actually shoot, but the defendant knows that the Government routinely rescinds contracts if the guns do not shoot, the defendant has “actual knowledge.” Likewise, because a reasonable person would realize the imperative of a functioning firearm, a defendant’s failure to appreciate the materiality of that condition would amount to “deliberate ignorance” or “reckless disregard” of the “truth or falsity of the information” even if the Government did not spell this out.

Slip Op. at 9-10 (citing Escobar, 136 S. Ct. at 2001-02). “Guns that do not shoot,” the Fourth Circuit explained, “are as material to the Government’s decision to pay as guards that cannot shoot straight.” Slip Op. at 10.

The Fourth Circuit also noted that the Government’s decision to not renew its contract with Triple Canopy and its decision to “immediately intervene[]” in Badr’s qui tam suit constituted “evidence that Triple Canopy’s falsehood affected the Government’s decision to pay.” Slip Op. at 10.

The Fourth Circuit’s decision is not surprising, but it is important. First, to the extent it characterizes its 2015 decision as taking “a narrower view of materiality than the Court” did in Escobar, it suggests that Triple Canopy is not going to be a limiting principle case—i.e., this case does not tell us the outer bounds of the implied certification theory. This should be troubling for anyone who does business with the Government because it suggests that novel theories of liability—to quote Lloyd Christmas—have a chance.

Second, Triple Canopy can be placed in the category of cases in which a contractual violation goes to the “essence of the bargain.” A run of the mill breach of contract is not the type of breach that goes to the “essence of the bargain” and therefore does not give rise to FCA liability. Accordingly, Triple Canopy might be distinguishable from future cases because of its bad factual allegations. As we wrote when we first covered this case, perhaps future courts “that face this same question will take a close look at the facts of the alleged conduct of Triple Canopy and properly limit the application of this decision to similar factual circumstances.”

What happens when an employee of a government contractor falsifies a record that is entered into an internal database that is subject to government review, but the contractor discovers the record and rectifies the situation before the record is actually reviewed or otherwise presented to the government? Could an aggressive prosecutor pursue the contractor for a criminal false statement?

Title 18 U.S.C. Section 1001 provides:
Except as otherwise provided in this section, whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully – (1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact; (2) makes any materially false, fictitious, or fraudulent statement or representation; or (3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry shall be fined under this title [and/or] imprisoned not more than five years.
“Material” is defined as having the propensity to influence the government; actual influence is not required. Neder v. United States, 527 U.S. 1, 16 (1999). TheU.S. Department of Justicehas gone so far as to say that a false statement is actionable if the false statement is made in a business record that may be subject to government review.[1] A number of circuit courts of appeal have applied this approach to false statements located in internal files reasoning that the purpose of the internal files was to provide an audit trail for the government. See, e.g., United States v. Rutgard, 116 F.3d 1270 (9th Cir. 1997) (false entries in Medicare patients’ charts that a doctor kept on file); United States v. Frazier, 53 F.3d 1105 (10th Cir. 1995) (false invoices that a nonprofit kept on file); United States v. Hooper, 596 F.2d 219 (7th Cir. 1979) (forged signatures for a federal student aid program that a university kept on file).

Other courts, however, have limited the government’s reach under Section 1001. “The Government would stretch the definition of materiality well beyond the existing case law by asserting that a statement is material even when the likelihood is minimal that the decision-maker will view it or take it into consideration.” United States v. Chase, 2005 WL 3288731 (D. Vt. 2005) (granting motion for judgment of acquittal with respect to counts under Title 18 U.S.C. Section 1035, the health care analog to Section 1001). Timely correction of a false statement, in fact, can eliminate materiality under Section 1001 entirely.

The case of United States v. Cowden, 677 F.2d 417 (8th Cir. 1982), provides a good example. In Cowden, the defendant arrived at Twin Cities International Airport in Minnesota via England and declared on his customs form that he was carrying less than $5,000 in cash. A customs agent began a routine inspection of the defendant’s briefcase and felt a parcel beneath the flap, but he did not remove it. The agent later testified that he did everything possible to avoid arousing the defendant’s suspicions. The agent asked the defendant if there was anything else he wished to add to his declaration. The defendant answered, “No.” The inspector then asked the defendant if he was carrying over $5,000 in cash. The defendant answered, “Yes, I would like to amend my declaration at this time.” The defendant, however, was not allowed to amend his declaration and his luggage was moved to a secondary inspection point where over $15,000 in cash was found. The defendant was subsequently convicted under Section 1001.

The Eighth Circuit reversed the defendant’s conviction because his false declaration to the customs agent was “almost immediately corrected by a true oral statement.” The Eighth Circuit explained that the inspection should have been conducted so that the probable result was compliance with the law instead of eliciting a violation of the law, and that the defendant should have been allowed to amend his declaration. Cf. United States v. Salas-Camacho, 859 F.2d 788 (9th Cir. 1988) (distinguishing timely correction from defendant’s “delayed admission” only after his vehicle was moved to a secondary inspection point and the customs agent informed him that he was aware of his prior smuggling conviction was actionable under Section 1001).

Aggressive prosecutors could argue that a Section 1001 violation is complete as soon as a falsified record is entered into a government contractor’s internal database. But the Cowden and Salas-Camacho cases provide contractors with a ready counterpoint: Since correcting a false statement actually received by a government agent can eliminate materiality, then, a fortiori, there should not be any materiality and therefore no Section 1001 violation when a falsified record is discovered and corrected before it is reviewed or otherwise presented to the government.

The case of United States v. Cannon, 41 F.3d 1462 (11th Cir. 1995) illustrates this point. In Cannon, the defendant was convicted under Section 1001 because he allegedly presented a government quality assurance representative (“QAR”) with a testing certification that stated that ballistically tested titanium had been used when nonballistically tested titanium had actually been used, and this caused the QAR to sign off on the corresponding DD-250 form (a form on which the government declares that the contract specifications have been satisfied and payment is due). When the government seized the testing certification, however, it stated that nonballistically tested titanium had been used. The Eleventh Circuit explained that “no reasonable trier of fact” could find the defendant guilty of “using false documents or representations” under Section 1001 when the testing certification accurately reflected the materials that had been used at the time the government first saw it.

The take-home message from Cowden, Salas-Camacho and Cannon is clear: Where the documents do not lie at the time they are viewed by the government, there should be no liability for a false statement because there has been no harm to the government.

]]>https://www.fcadefenselawblog.com/2017/05/no-contractor-liability-false-statement/feed/0https://www.fcadefenselawblog.com/2017/05/no-contractor-liability-false-statement/DOJ Issues New Guidance on the Evaluation of Corporate Compliance Programs in Federal Fraud Investigationshttp://feeds.lexblog.com/~r/FalseClaimsActDefense/~3/5ORiCKQJV1Q/
https://www.fcadefenselawblog.com/2017/03/doj-issues-new-guidance-on-the-evaluation-of-corporate-compliance-programs-in-federal-fraud-investigations/#respondThu, 02 Mar 2017 22:34:21 +0000http://www.fcadefenselawblog.com/?p=1413Continue Reading]]>On February 8th, the U.S. Department of Justice (DOJ) quietly issued new guidance on how the agency evaluates corporate compliance programs during fraud investigations. The guidance, published on the agency’s website as the “Evaluation of Corporate Compliance Programs,” lists 119 “sample questions” that the DOJ’s Fraud Section has frequently found relevant in determining whether to bring charges or negotiate plea and other agreements. The February 8th issuance is the agency’s first formal guidance under the new presidential administration, and the latest effort by the DOJ’s “compliance initiative,” which launched at the hiring of compliance counsel expert Hui Chen in November 2015. The new guidance is particularly valuable for healthcare organizations in light of the agency’s heightened efforts to prosecute Medicare Advantage plans for fraudulent reporting under the False Claims Act.

Principles of Federal Prosecution in Corporate Fraud Cases

The “Principles of Federal Prosecution of Business Organizations,” first published by the DOJ in 1999, articulates the principles that federal prosecutors consider when assessing cases involving corporate fraud. For example, prosecutors will look to “the existence and effectiveness of the corporation’s pre-existing compliance program,” as well as the corporation’s remedial efforts “to implement an effective corporate compliance program or to improve an existing one.” The DOJ last updated the principles, or “Filip Factors,” in November 2015 to require companies to turn over all information about individuals’ conduct to earn cooperation credit during an investigation.

The February 8th guidance draws from existing federal sentencing guidelines as well as best practices published by the Organization for Economic Cooperation and Development (OECD) and the Securities and Exchange Commission (SEC). The document’s 119 sample questions are organized into eleven topics that the DOJ adapted from the “Ten Hallmarks of an Effective Compliance Program,” a set of principles published by the DOJ and SEC in the Foreign Corrupt Practices Act (FCPA) Resource Guide (2012), an international best practices guide of the FCPA’s anti-bribery and accounting transparency provisions under the Securities Exchange Act of 1934.

Sample questions are organized into the following topics:

Analysis and Remediation of Underlying Conduct

Senior and Middle Management

Autonomy and Resources

Policies and Procedures

Risk Assessment

Training and Communications

Confidential Reporting and Investigation

Incentives and Disciplinary Measures

Continuous Improvement, Periodic Testing and Review

Third Party Management

Mergers & Acquisitions

While corporate compliance officers are likely well versed in the existing guidelines, the new guidance offers more express, practical examples of how federal prosecutors may investigate a company’s compliance program under the Filip Factors.

What Can Corporations Expect from the New Guidance?

During a federal investigation, the DOJ is not only interested in the corporate compliance program’s written policies, e.g. risk management methodology and compliance training, but also in concrete examples that demonstrate how the program has operated in practice.

For example, the DOJ may investigate the compliance program’s “empowerment” during instances where compliance raised concerns of misconduct. The guidance asks corporations if, because of compliance concerns, there had been any transactions or deals that were stopped, modified, or more closely examined. Further, in evaluating a program’s “operational integration,” the guidance asks the corporation how the misconduct in question was funded (e.g., purchase orders, employee reimbursements, discounts, petty cash), and if the processes that could have prevented or detected improper access had been improved.

The guidance also indicates that the DOJ will consider the corporation’s incentive system for employees to comply with laws and ethical behavior, and suggests that senior leaders and other stakeholders will be held accountable for their involvement in encouraging or discouraging the misconduct in question.

Although the agency cautions that “each company’s risk profile and solutions to reduce its risks warrant particularized evaluation,” the sample questions and topics are those that the Fraud Section has “frequently found relevant” in evaluating a corporate compliance program.

The relator generally alleged that the defendants were required to maintain and report “headcount data” under a contract relating to the maintenance and operation of recreation centers Iraq for United State troops and that defendants overstated its headcount. McBride, 2007 WL 655439, *2. After the realtor filed her complaint under seal in 2005, the Defense Contract Audit Agency (DCAA) investigated issued “written questions to” defendants, visited the recreation centers “to review records and interview [defendants’] personnel. The DCAA did not issue any formal findings, but neither DCAA nor any other Government agency disallowed or challenged any of the amounts” defendants had billed. Id. The district court granted summary judgment to defendants and the DC Circuit upheld that decision.

Of key importance to defendants is the DC Circuit analysis of materiality, or the lack thereof, given government failure to seek repayments following investigation. It stated:

Absent any connection between headcounts and cost determinations, it is difficult to imagine how the maintenance of false headcounts would be relevant, much less material, to the Government’s decision to pay KBR. Nevertheless, McBride persists, claiming as “dispositive” an Administrative Contracting Officer’s (ACO) statement in a declaration that he “might” have investigated further had he known false headcounts were being maintained, and that such an investigation “might” have resulted in some charged costs being disallowed. The ACO’s speculative statement could be true of the maintenance of any kind of false data; it tells us nothing special about headcounts. At most, the statement amounts to the far-too-attenuated supposition that the Government might have had the “option to decline to pay.” See Universal Health, 136 S. Ct. at 2003 (“Nor is it sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance.”). Given the speculative and generic nature of the ACO’s statement, and the “rigorous” and “demanding” materiality standard that must be met, id. at 2002-03, McBride’s evidence will not suffice to defeat summary judgment.

Moreover, we have the benefit of hindsight and should not ignore what actually occurred: the DCAA investigated McBride’s allegations and did not disallow any charged costs. In fact, KBR continued to receive an award fee for exceptional performance under Task Order 59 even after the Government learned of the allegations. This is “very strong evidence” that the requirements allegedly violated by the maintenance of inflated headcounts are not material. See id. at 2003 (“[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”).

For government contractors and suppliers, this decision underscores the importance of agency investigations and successful resolution of such investigations as part of a comprehensive False Claims Act defense.

]]>https://www.fcadefenselawblog.com/2017/03/us-ex-rel-mcbride-halliburton/feed/0https://www.fcadefenselawblog.com/2017/03/us-ex-rel-mcbride-halliburton/Justice Department Joins Whistleblower Suit Accusing UnitedHealth Group of Overcharging Medicare by “Hundreds of Millions”http://feeds.lexblog.com/~r/FalseClaimsActDefense/~3/p5YLXFSwMk8/
https://www.fcadefenselawblog.com/2017/02/justice-department-joins-whistleblower-suit-accusing-unitedhealth-group-of-overcharging-medicare-by-hundreds-of-millions/#respondFri, 24 Feb 2017 17:33:18 +0000http://www.fcadefenselawblog.com/?p=1408Continue Reading]]>The U.S. Department of Justice (DOJ) has joined a whistleblower lawsuit, United States of America ex rel Benjamin Poehling v. Unitedhealth Group Inc., No. 16-08697 (Cent. Dist. Cal. Sep. 17, 2010), ECF No. 79, against UnitedHealth Group (United) and its subsidiary, UnitedHealthcare Medicare & Retirement—the nation’s largest provider of Medicare Advantage (MA) plans. The suit accuses United of operating an “up-coding” scheme to receive higher payments under MA’s risk adjustment program called the HCC-RAF Program (see below). The complaint alleges that United fraudulently collected “hundreds of millions—and likely billions—of dollars” by claiming patients were sicker than they really were. The suit was originally filed in 2011 by a former United finance director under the False Claims Act (FCA), which allows private citizens to sue those that commit fraud against government programs. Pursuant to the FCA, the case was sealed for five years while the DOJ investigated the claims.

The Medicare Advantage Risk Adjustment Program

MA plans are the privately administered, managed care alternative to hospital, physician, and drug coverage under Traditional Medicare. The MA program has tripled in size in the last decade to nearly 16 million enrollees, or 30 percent of all Medicare beneficiaries.

The Centers for Medicare & Medicaid Services (CMS) reimburses MA plans with capitated payments which are identified by the applicable diagnostic classification codes called “Hierarchical Condition Categories” (HCC). The payments are risk-adjusted for patient health and complexity through “Risk Adjustment Factors” (RAF) that reflect financial utilization and risk. Because of the RAF adjustments, MA plans receive increased reimbursement for the treatment of sicker patients, i.e. patients who cost more to treat. As described by CMS, the purpose of the HCC-RAF program is to provide increased payments to MA plans that attract higher-risk populations, e.g. patients with chronic conditions, and, in turn, reduce the incentives for issuers to avoid higher-risk enrollees.

The HCC-RAF program requires that a patient’s condition be verified in-person and on a regular basis by a qualified professional.

Justice Department Crackdown on MA Fraud

The lawsuit at issue alleges that in 2010, United implemented an organization-wide upcoding scheme called “Project 7” to increase its operating income by $100 million. Under the scheme, United instructed its coding specialists to code patients for high-risk, long-term conditions by “mining” patient records for evidence of possible conditions without completing the required in-person verification. The suit also alleges that United offered incentives to its contracted provider groups to code patients for more severe conditions than were diagnosed.

Although the suit names 15 insurers, the DOJ is only seeking to intervene on FCA violations involving United and its subsidiary. United, which serves 2.9 million Medicare beneficiaries, has since denied the claims, contending the accusations are based on a faulty interpretation of the applicable Medicare rules.

Under the FCA, United may be subjected to a civil penalty of up to $11,000 for each violation, plus three times the amount of the damages sustained by the United States.[1]

The case follows more than a half-dozen whistleblower suits filed against MA plans in the past five years. For example, in March 2016, a court unsealed a lawsuit against MA plan provider Humana, alleging the insurer had encouraged physicians to inflate patient risk scores. United States of America ex rel. Olivia Graves v. Plaza Medical Centers Corp., et al., 1:10-cv-23382-FAM. In August 2016, the Ninth Circuit reopened the Swoben case (Swoben v. United Healthcare, No. 13-56746 (9th Cir. 2016))[2]; a case in which James Swoben alleged that multiple MA organizations, including United, routinely performed retrospective reviews that were structured: (1) to identify services that were under-coded, allowing the organizations to up-code and, in turn, increase their payments under the HCC-RAF program; but (2) to avoid the identification of over-coded services that, if corrected, would decrease payments under the HCC-RAF program. In short, Swoben alleged that the defendants’ use of one-sided retrospective reviews to identify under-coding instead of two-sided retrospective reviews to identify both under-coding and over-coding meant that the MA organizations were either (1) acting in deliberate ignorance of the truth or the falsity of their certifications, or (2) were acting in reckless disregard for the truth or the falsity of their certifications.

In 2013, CMS estimated that it improperly paid $14.1 billion to MA organizations, primarily due to fraudulent risk adjustment claims. These lawsuits, including the Poehling case, indicate federal fraud enforcement agencies may double down on efforts to bring MA plans into compliance by investigating, and potentially imposing significant penalties on, MA plans that are shown to have improperly collected millions of dollars by overcharging Medicare through the HCC-RAF program and other devices. Certainly, the United States’ refusal to intervene in the Swoben case in 2013, followed by the 2017 decision to intervene in the Poehling case, may be an indication of a more aggressive stance being taken by the United States Attorney General in the prosecution of MA-related fraud cases.

[1] Please note that the 2016 increase in FCA per-claim penalties does not apply in this case. In 2016, the minimum penalties for FCA violations were increased from $5,500 to $10,781 and the maximum penalties from $11,000 to $21,563—per claim. By regulation, the adjusted penalty amounts apply only to civil penalties assessed after August 1, 2016, whose violations occurred after November 2, 2015. Violations that occurred on or before November 2, 2015 and assessments made before August 1, 2016 (which is the case here) remain subject to the $5,500 to $11,000 per claim penalty amounts.[2] Unlike in the Poehling case, in January 2013, the United States declined to intervene in the Swoben. Accordingly, the district court ordered the complaints unsealed and served on United and the other defendants.